Is now the best time to buy shares?

Are shares cheap? Is now the best time to buy shares?

It sounds obvious, but in my book the best time to buy shares is when they're cheap.

Normally, investors buy shares when the news is good. This means they are buying shares at high prices, while selling them when the gloom gets going, i.e. they are selling them low. Basically, you are losing twice: once on the up and secondly, when you’re exiting.

What about a contrarian view on when the best time to buy shares is?

Remember Warren Buffett’s comment on this:

". . . In short, bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price . ."

Is now the best time to buy shares?

Well, it all depends . . .

The early part of the second half of 2009 may have been the best time to buy shares for some time to come.

But what if you have missed that period . . . .

Will it be an even greater time to buy, say, in a couple of months?

Again it depends on your view of the economy and the stock market.

What happened with dividend yields in 2008/2009?

The fall in share prices in 2008/2009 had the effect of boosting dividend yields on a large number of shares to extremely attractive levels, including many of the biggest companies listed on the London stock market. This process, with regards to income yielding shares has now been reversed to a certain extent, at least, in my mind.

For example, look at British American Tobacco’s share price recent all time high (!), hitting almost £24.65 a share, earlier in October 2010. At that price, with a prospective dividend amounting to say (a conservative?) £1.10, BAT has “just” a prospective yield of 4.46 per cent. But, of course this is not the whole story.

Still beating high street savings accounts, you would say, but not necessarily fantastic. In particular, as a year ago you could easily have bought shares in BAT at around £19.50 i.e. £5,00 cheaper when they were yielding 5.1 per cent.

Click Here, if you have not yet seen our write-up on British American Tobacco’s five year dividend history and prospects

Prechter on CNBC: Market Pro: Long Bear Market Looming

Robert Prechter, president of Elliott Wave International, tells host Maria Bartiromo why he sees dark days ahead on CNBC's Closing Bell.

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So, have we missed the "income-boat"?

Not necessarily!

Even after the recent upturn in share prices, personally, I don’t expect the FTSE100 index to breach its peak of the year, that happened earlier in April.

Instead, and this may or may not be controversial, I believe that we are in the middle of a rather long-term downtrend which began as far back in 2000, albeit one punctuated by bear market rallies such as the ones during 2003-07 and 2009-10.

Why am I so pessimistic?

In particular now, with huge spending cuts to be announced shortly, more tax rises to be implemented/announced in the New Year and the general mood in the country worsening with strikes looming, going forward, I would not be surprised to see UK markets revisiting their lows of 2003 and 2009, mid next-year.

Of course, I may be wrong!

Of course, I may be completely wrong, and this may be the start of a major bull market . . . and now may be the best moment to buy shares.

However, if and when the FTSE100 index reverts to its downward trend, breaching the 2003 and 2009 lows, then may be the best time to buy shares. Particularly, those with high sustainable dividend yields. These will then be "dirt cheap".

Until that moment, I will be keeping my powder dry and am happy to accumulate cash from my dividends and ISA and SIPP contributions and leave it in there.

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